Understanding Closing Costs

What closing costs are

Closing costs are the fees and prepaid items due when a property changes hands, separate from the purchase price. For buyers they commonly total two to five percent of the price; sellers typically pay more because commissions are usually settled on their side. Exact amounts depend on the state, the property, and the terms of the contract.

Common buyer-side items

• Loan origination and underwriting fees charged by your lender
• Appraisal fee, paid to an independent appraiser
• Credit report fee
• Title search and lender's title insurance
• Owner's title insurance (optional in some states, customary in others)
• Recording fees paid to the county
• Prepaid interest from the closing date to the end of the month
• Initial escrow deposits for property taxes and insurance
• Homeowners insurance premium for the first year

Common seller-side items

• Real estate commissions as agreed in the listing contract
• Transfer taxes, where applicable
• Prorated property taxes up to the closing date
• Payoff of any existing mortgage and recording of its release
• Homeowners association transfer or estoppel fees
• Any repair credits agreed to during negotiation

Reading the estimate and the final statement

Early in the process buyers receive a written estimate of costs. Shortly before closing they receive the final settlement statement. Federal rules limit how much certain categories of fees may increase between the two, so compare them side by side. Ask for an explanation of any line that changed, and confirm that credits agreed to during negotiation appear.

What is negotiable

Who pays for what is set by the contract, not by law, in most places. Buyers sometimes ask sellers to contribute toward closing costs, and sellers sometimes offer credits in place of repairs. Third-party fees such as title and escrow charges vary by provider, and you are generally free to choose your own providers for several of them.

Protecting your funds

Closing funds are usually sent by wire. Always confirm wiring instructions by calling the title or escrow company at a phone number you looked up independently, never one from an email. Fraudulent last-minute changes to wiring instructions are a common and costly scam.